Airtel absorbs Service Tax Hike for Pre-Paid Customers, Will Idea / Vodafone do ?

Airtel Prepiad Service Tax ImpactIndian Government has only one option to Tax its citizens – Indirect Tax at Source, as a pathetic 4% Indians pay Income Tax. The new regime under Narendra Modi has hiked the Service Tax by 200bps to 14% [Swach Bharat Cess still a overhang]. Our channel checks on tariff changes over the last couple of days suggest that Airtel has largely absorbed the recent increase in service tax in the prepaid segment leaving the net outgo for the subscriber unchanged. For Post-Paid subscribers, (<15% of total), the higher tax has been passed on as there is nothing much Airtel can do about it except raising Free On-Net call limits, if at all it wishes to do so.

On prepaid, this means that operators have either settled for a lower processing fee (lower RPM, unchanged MoU), or cut the talk time on top-ups (lower MoU, unchanged RPM). This highlights the lack of pricing power in the industry. Service Tax affects all operators simultaneously, and to the same extent (a % of sales). When the industry has been unable to pass on such cost to customers, we are skeptical of spectrum cost (where the burden is clearly not uniform for all players) being passed on.

Airtel pre-paid plan vouchers pre and post service tax increase
Karnataka – STV of Rs 28 would give the customer – All STD calls at 40p/min for 28 days. Airtel’s realization has gone down from Rs 24.6 to Rs 24.9 while Service Tax has increased from Rs 3.1 to Rs 3.4 thus giving Airtel a hit on RPM.

Mumbai 3G STV of Rs 252 would give the customer 1 GB 3G data for 28 days. Airtel’s realization has gone down from Rs 224.3 to Rs 220.1 while Service Tax has increased from Rs 27.7 to Rs 31 thus giving Airtel a hit on Revenue Per MB.

New Delhi – STV of Rs 111 would give the customer – 200 local and STD minutes over 14 days. Airtel’s realization has gone down from Rs 98.8 to Rs 96.4 while Service Tax has increased from Rs 12.2 to Rs 13.6 thus giving Airtel a hit on RPM.

Generally, a reduction in talk-time for customers in case of low denomination top-up plans will lead to a fall in MoU for customer (keeping RPM intact). Note that under the current rules, top-up plans are sold only in multiples of Rs 10, so it is highly likely the customer just sticks with his old plan with lower talk time than upgrade to a higher plan. While BSNL is a charity, RCom a Titanic and the fate of Market leader Airtel is as described above, do Vodafone and Idea Cellular have any other choice ?

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